IFRS 16 - Leases: Challenges, Perspectives and Implications in the Light of Substance Over Form

Abstract

Objective: To start a theoretical debate on the main challenges and impacts of the standard IFRS 16 and its implications for the accounting treatment of leases, further analyzing compliance with the new models imposed in the light of the primacy of substance over form. Method: In methodological terms, this is a theoretical essay, as the discussion is focused on knowledge that has not been developed yet in the Brazilian literature, presenting the most recent aspects found in the international literature on IFRS 16 and complementing the analysis of the standard in the light of Accounting Theory. Therefore, the main problems appointed in the previous standard are highlighted, analyzing documents and perspectives IASB and other entities have published to demonstrate how companies should prepare for the challenges the standard entails. Almost all of its items require a high level of subjectivity and professional judgment. Results: The discussion of the topics reveals that the lessees perceive the main challenges the standard entails. The unique accounting treatment model brings a series of subjectivities that start with the On/Off balance sheet test, with concepts to identify if the contract is or contains leasing. Then, the subjectivity of identifying and separating between the leasing and non-leasing components of a contract can be a complex exercise that will require further information the lessor should offer, and/or the use of an independent baseline price for that breakdown. At the macro level, the main consequence of the impact of the standard are the changes in the financial measures (such as EBTDA, ROE, ROA); new estimates; greater judgment; and volatility of the balance sheet. Contributions: From the academic viewpoint, the theoretical debate on the new accounting standard, which will come into force in 2019, adds an important reflection for Accounting as a Science. For the Market, the issues raised as the main challenges in the standard soon to be adopted in Brazil offer new perspectives for the companies that are facing the transition period to adopt the new standard.